The National Budget will be delivered by South Africa's Minister of Finance, Pravin Gordhan, on 27 February 2013. Taxpayers and tax professionals are waiting with bated breath to see what changes will be announced in the upcoming Budget Speech. One can expect the usual increases, attempts to give money back to taxpayers, only to then take away the 'relief' through increases in levies, tariffs and duties. If rumours in the press and media are taken to heart, the golden goose, South Africa's unappreciated and mostly unrepresented taxpayers and the small, medium and large corporate taxpayers will face an unabated onslaught. In many respects it appears that South African Taxpayers approach the continuous changing tax environment in line with Alfred Lord Tennysons' quote "ours not to reason why ours but to do and die"?

The frightening aspect related to the media and press statements leading up to the Budget Speech is that if the rumours come true all taxpayers and professionals will face new challenges in either monetary or technical forms. Economists now report, almost daily, that the status quo cannot persist. If our government continues on the current path of high taxes, low infrastructure development and non-delivery of infrastructure we face an uncertain and uncharted future. Challenges are not new to the tax world, yet there are current changes which have come into being in a rather stealthy form. A stealthy change related to the tax environment which taxpayers and professionals now face is brought about by the Tax Administration Act No. 28 of 2011 (the TAA).

The TAA, promulgated on 4 July 2012, introduces South Africa's first single administrative legislative environment. Whilst this development is a commendable step towards certainty, clarity and predictability, it has unfortunately enabled the South African Revenue Service (SARS) to introduce certain far-reaching administrative powers, including a stringent and arguably a punitive interest and penalty regime.

Legislation of this nature remains controversial at the best of times. SARS application of the TAA towards taxpayer affairs prior to 2012 is certainly opening a host of legal issues and it is merely a matter of time before the South African courts will be required to address various matters flowing from the TAA, its implementation and administration. In a constitutional democracy, it is perhaps time for taxpayers to embrace the fundamental rights and protection granted by our courts in the face of an ever increasing hostile tax authority. It would be rather unfortunate if the TAA and SARS administrative actions harm our tax system, which is currently comparable to the leading tax systems in the world.

A question may well be raised as to what is all the noise about? Perhaps the issues are best illustrated with reference to certain aspects of the TAA.

How much interest and penalties?

The TAA introduced a new interest and penalty regime, far more onerous for the taxpayer than the previous regime, albeit more predictable. What is even more alarming is that Section 270 of the TAA provides for retrospective application of the provisions of the Act to matters arising before 1 October 2012, except in circumstances where such actions or proceedings have been completed prior to this date.

The TAA provides for three penalties:

  • An understatement penalty, being a percentage between 5 and 200 percent of the shortfall amount;
  • A fixed amount penalty to a maximum of R16 000, calculated with reference to the taxpayer's taxable income for the previous tax year, and imposed for any non-compliance with any obligation imposed under tax law, which penalty is levied monthly for as long as the non-compliance is not remedied; and
  • A percentage based penalty.

Prior to the TAA, in the event that a taxpayer claimed an impermissible deduction, the deduction was simply disallowed, and no penalty was payable, provided that there was no intentional tax evasion at play. In contrast, taxpayers may be punished for an honest mistake under the new regime. In the event that a deduction is disallowed by SARS, the taxpayer will be liable to pay an understatement penalty of up to 200 percent of the understated amount, depending on the conduct of the taxpayer.

In terms of the new interest provisions, interest will be imposed for the period from the so-called "effective date" of the tax to the date the tax is paid. The result, according to SARS, is that the in duplum rule will not apply. This means that the interest payable by the taxpayer may exceed the amount of outstanding tax due to SARS. This arrangement is unheard of in statutory South African law. Furthermore, interest will now be compounded monthly. The irony and unsettling reality faced by taxpayers is that SARS will not pay compounded interest to a taxpayer where it owes money.

The provisions of the TAA provide for the remittance of interest or penalties only in a limited number of well defines exceptional circumstances, thus reducing the Commissioner's discretion in remitting these penalties.

The professionals

The powers given to SARS in respect of penalties were not unexpected. In addition to many provisions relating to taxpayers, SARS has revised the requirements for the registration of tax practitioners. Essentially, it is now a legal requirement for tax practitioners to register with controlling bodies before being allowed to register with SARS. It is certainly noteworthy that the requirements for tax professionals to register with controlling bodies do not apply to SARS. Again, one could sense the irony of having a system where the professionals acting for the taxpayer face severe regulation, however, the administrator is allowed to act as it pleases. If conspiracy theorists are to be taken to heart, it appears that the administrator is seeking to ensure complete control over the professionals dealing with tax matters.

South Africa's tax system is certainly sophisticated and stands tall among world tax regimes including the BRICS, the UK (United Kingdom), the EU (European Union), Australia and perhaps even the USA (United States of America). Yes, a lot still needs to happen locally, however, in some respects, like eFiling, we are pioneering tax in the 21st century.

On 18 January 2013 a US court permanently barred the IRS from enforcing a new regulatory regime for tax-return preparers. The court concluded that the new regulations would place an undue burden on tax-return preparers. Not only would the new regulations require a tax-return preparer to pass a qualifying exam, pay an annual application fee, and take 15 hours of continuing education courses each year, but it would also allow the IRS to levy penalties against tax-return preparers. It is clear from this judgment that US courts do not look favourably upon tax authorities' increased powers, as this could threaten the livelihood of tax practitioners, should they be forced to comply with the new regulatory scheme.

Our TAA includes provisions which would distinguish this case from applying in South Africa. However, the approach by the courts towards unchecked administrative powers to regulate and restrict is likely to be followed by South African courts.

In the end

As tax professionals and taxpayers we have an obligation to ensure that the correct amount of tax is paid. This is determined by virtue of the Income Tax Act and other Tax Acts. Administrative actions and penalties should not replace a robust and sound tax system.

As taxpayers we should question unchecked administrative authority and ensure that our Constitutional Democratic principles are always upheld by the State. And perhaps it is appropriate to end with Shakespeare:

"If we shadows have offended,
Think but this, and all is mended,
That you have but slumber'd here
While these visions did appear..."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.